Recovery from the 2008-09 recessions is proving more challenging than was originally predicted. Given the level of challenges facing the global economy we are now forecasting that a period of sustained growth will not be achieved until at least 2017.
Recovery from Recession?
Returning the global economy to long-run average growth (‘trend growth’) following the 2008-09 recession has been far slower and more challenging than even the most pessimistic analysts had thought. The global economy is facing its slowest recovery from recession in the past century and still faces a number of challenges that must be overcome before trend growth can be resumed. Indeed, D&B believes this will not happen before 2017 at the earliest. As 2012 draws to an end, the US economy staggers on without achieving strong growth, the euro-zone remains in crisis and Chinese growth has slowed; all of which presage bad news for 2013.
Challenges into 2013
In terms of fiscal challenges, government austerity measures are taking around 0.5-1.0 percentage points off growth, with the threat of the American ‘fiscal cliff’ being a major threat to US and global growth. The effects of monetary policy being pursued by central banks in the OECD countries are less clear cut, but in the medium term they will impact on increased volatility in commodity prices and exchange rates, asset bubbles, higher inflation, and potential market disruptions as exit strategies are implemented. Uncertainty also centres around how long the ‘tail’ created by these factors will be. If either the euro crises or US fiscal cliff scenarios are resolved then there will be downward pressure on oil prices. However, there are large (and increasing) geopolitical tensions that could boost oil prices in the short term. Another weak growing season (in the US and elsewhere) in 2013 could further exacerbate food price inflation globally, with accompanying political and economic risks. Food inflation will also curtail the ability of democratic and nondemocratic governments to implement the fiscal austerity measures necessary to restore long-term economic growth.
2014-16: In the period 2014-16, growth will benefit from the restructured private sector, which has strengthened its balance sheet (this is particularly the case in the US), but will be undermined by the problems of the public sector debt hangover.
2017 and Beyond: As economic recovery shapes up many countries will emerge with greatly increased public debt to GDP ratios. This may result in permanently raised global real interest rates (crowding-out private investment); elevated levels of taxation; elevated sovereign risk premiums (which in turn will limit the scope of future counter-cyclical fiscal policies); higher inflation; and a greater likelihood of sovereign defaults.
However, by late 2017 restructuring in the emerging markets and the fiscal challenges should have been addressed, heralding a return to trend growth. Nevertheless, other longterm factors will need to be addressed, including steps to correct the pension time bomb as populations age. Furthermore, we may be entering a world (specifically in the OECD countries) of permanently reduced potential output and risk aversion, with a permanent global savings glut as investment opportunities remain muted.
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